Forex history: Pegged and semi-pegged currencies

Pegged and semipegged currencies

The first real test of the Bretton Woods Accord was due to the dramatic fluctuation rates of currency. A chain reaction resulted that ended with President Richard Nixon abandoning the gold standard in 1973. And, heavy pressure from the world markets caused the collapse of the fixed rate system allowed currencies to float freely.

Since the ancient days of Pharaoh, there has been some form of money. The first known use of paper currency and receipts is accredited to the Babylonians. The first exchanges of coins between various cultures were first practiced by Middle Eastern money changers. The need for other forms of currency other than coins occurred during the middle ages. But, the Foreign Exchange market, known as Forex as we know it today wasn't established until 1973.

Regional economies began to flourish when paper currency made it much easier for traders and merchants to make and receive payments in funds. From the middle ages when the Forex system first began emerged up until World War I, the market had remained fairly stable and didn't see much speculative activity.

However, after World War I, speculative activity increased as much as tenfold and the Forex markets became very unstable. The general public as well as most institutions began to look upon the Forex system unfavorably. The removal of the gold standard during the Great Depression in 1931, created a serious decline in Forex activity.

The market went through a series of changes that made a major impact on global economies between 1931 and 1973. During these years, there was very little speculation in the Forex markets. Today, the Forex market if one of the fastest growing markets world wide. In 1998, it became available to average investors and sees volumes that exceed the entire stock market almost 100 times over on a daily basis.

After the demise of the European Joint Float and the Smithsonian Agreement, foreign exchange markets made the official switch over to a free floating market system. Although, the free floating system was mainly chosen because of a lack of other options, it was not forced in any way. This gave each individual country the freedom to choose to peg, semi-peg or free float their respective currencies.

Pegged currency simply refers to currencies that have an exchange rate based on the currency of another country. Many smaller economies have pegged their currency with that of countries with larger economies that they consider to be economic liaisons. Many of the Caribbean nations, like Jamaica, have chosen to peg their currencies to the U.S. dollar.

Since 1993, the practice of using semi-pegged currencies has no longer been in use. The European Monetary System, EMS is a good example of how currencies were semi-pegged. Those European currencies were only allowed to fluctuate at a rate of 2.25 percent and with intervention bands of 6 percent. When the foreign exchange crisis hit in 1993, the EMS expanded their intervention rates to 15 percent. When currencies neared the maximum values allowed, semi-pegging would minimize them. The EMS switched their semi-pegged currencies over to pegged values forming the Euro in 1999.